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Preqin 2015 Global Alternatives Reports


2015 outlook for alternative assets


Preqin has been busy preparing its end-of-year investor and fund manager reports across all major alternative asset classes: hedge funds, private equity, private real estate and infrastructure. The following article summarises the key findings from these reports at a broad strokes level. 

Hedge Funds

2014 proved a challenging year for hedge funds. Performance-wise it was the worst year since 2011, with the average hedge fund failing to hit 4%. Unsurprisingly, performance (33%) and fees (21%) are cited as the top two challenges for the industry by institutional investors for 2015. According to Preqin, this could work to the advantage of smaller and emerging managers who might well attract greater inflows this year. 

Whilst much of the inflows continue to go to the big name funds, investors continue to show interest in emerging managers as they recognise their potential for better returns, or access to niche strategies. 

“Fund-of-hedge-fund managers can help investors access emerging manager programmes. Some pension schemes are trying to put together their own emerging manager programmes but it’s very difficult for most institutional investors to do; FoHFs have the connections and the right expertise to structure emerging-manager vehicles,” comments Amy Bensted, Head of Hedge Fund Products at Preqin. 

• Total hedge funds assets almost at USD3.02tn (USD2.98tn)

Despite the poor performance of hedge funds in 2014, investors continue to hold faith. 2015 needs to be a good year, however. Preqin’s survey findings show that 35% of investors felt that returns fell short of expectations; up from 16% in 2013, when performance was admittedly stronger.

“What is driving asset allocations? It’s clearly more than just return expectations. Investors are looking for high risk-adjusted returns (33% of those surveyed) and are investing for long periods of time,” says Bensted.         

• The AUM of funds of hedge funds has shown net growth for the first time since December 2011. 

This has been driven by the recovery in North American funds of hedge funds – Europe on the other hand has shown continued decline and the gap between the regions has widened.

• Hedge funds need to overcome negative PR

The decision by CalPERS to divest their hedge fund investments was a big story in 2014. People wondered whether it would lead to a stampede of large investors exiting the hedge fund space but so far there’s no evidence of that happening. Trustees are asking a lot of questions about returns and whether the fees are justified, but Bensted notes that in conversations with investment officers at pension funds, they recognize the value of this asset class. 
“For hedge fund managers and the industry as a whole, overcoming the negative PR issue is important in 2015. Investment officers might recognize the value of hedge funds but pension fund trustees and the wider public are still in the dark about what these funds do,” comments Bensted. 

Point being, more education needs to be done on investors understanding the fact that hedge funds are not short-term investments. They are not designed to outperform rising markets year after year; the minute they have a tough time, like 2014, people are quick to denounce them. That perception has to change.

“Hedge funds prove their worth over long periods. It’s not so much an alternative asset anymore and is becoming more of a mainstream part of investors’ portfolios,” adds Bensted.

• Liquid alternatives will continue to grow

“I think they are really interesting at the moment. It’s creating an opportunity for managers to attract a wider audience of investors. We’re now seeing smaller investors accessing these strategies – private wealth investors like regulated structures with higher liquidity and more transparency at a lower cost. We could well see more capital being channeled into these funds in 2015. 

“It’s good for the industry because it’s diversifying the offering, which in turn is diversifying the audience for fund managers,” says Bensted.

• Credit strategies predicted to be the worst performer

Approximately 30% of managers expect credit strategies to be the worst performer in 2015. By contrast, macro (24%) and equity (23%) strategies are predicted to be the best performers. Bensted thinks 2015 could also be a turning point for CTAs if market volatility persists. Some 23% of managers with a plan for a new fund said they planned to launch CTAs this year, second only to equity fund launches (41%).  

Overall, 27% of managers plan to launch a new fund in 2015. 

• Biggest challenges for managers in 2015: Regulation (53%), ongoing volatility (41%), and fundraising (37%)

Over half (57%) of the managers surveyed think AIFMD will have a negative impact in 2015. Only 27% are compliant with AIFMD. 

“Regulation is very high on the list of managers’ concerns, globally. It’s become a much more complex business being a hedge fund manager. 53% cited regulation as the biggest challenge in 2015 and that figure keeps rising year-on-year. It’s adding cost and complexity to hedge funds, managers need more back-office staff, more legal advice.  

“Quite a significant proportion of US managers are not compliant. They have a captive audience in the US. We are seeing quite a lot of managers not wanting to market in Europe and either rely on reverse solicitation or avoid Europe altogether,” confirms Bensted. 

Performance and regulatory concerns look set to dominate 2015, therefore, along with the continued democratization of hedge funds via the growth of liquid alternatives. Overall, 60% of managers think that the 2015 Preqin All-Hedge Fund Benchmark will surpass that of 2014.   

Private Equity

2015 looks set to be a challenging year amid increased competition with 34% of private equity managers expecting the environment to be “more difficult” than 2014. Fifty-four percent of those surveyed felt that the level of competition for PE transactions had increased year-on-year.

• Fundraising to get tougher in 2015

The biggest challenge facing managers is fundraising, cited by 37% of the survey’s respondents, followed by valuations (32%) and performance (29%).

“I think the level of fund raising and overall competition will be a key challenge in 2015. The total aggregate raised in 2014 by first-time managers was about 7%, which is similar to 2013. That’s the lowest level it’s been for quite some time and illustrates how tough it is; managers need to lock in performance and generate a track record to help single out the ‘haves’ from the ‘have nots’,” comments Christopher Elvin, Head of Private Equity Products at Preqin.  

• Rising levels of dry powder

The big story in private equity in 2014, says Elvin, has been the continued high-level distributions that investors have seen.  In 2013, a record USD580bn was paid out to Limited Partners but already through June 2014 that figure was close to USD450bn, indicating just how attractive market conditions have been for managers. 

“The extent to which those distributions have surpassed the capital calls has provided liquidity to investors. With the liquidity that managers have got heading into 2015, it is increasing the overall level of competition,” says Elvin.
Because of rising levels of dry powder, the ability to find attractive investment opportunities is set to be challenging, which managers fear could negatively impact on performance. The amount of dry powder versus capital called at the end of 2013 was about 2.3x. 

The last time the figure was that high was back in 2008. 

In terms of capital raising opportunities, North America (67%) and Europe (66%) are the preferred markets for GPs in 2015 but what is revealing is that 36% will be looking to source capital from ASEAN LPs. 

“North America and Europe remain the dominant markets and that’s where investors think the best opportunities lie. That said, China is still very popular and there’s no doubt there’s plenty of potential there in 2015 and beyond,” adds Elvin.

• Strong investor appetite but fees are #1 concern

Like hedge funds, institutional investors still strongly favour private equity. Seventy-nine per cent of investors surveyed by Preqin said that they planned to maintain or increase their allocations over the coming 12 months. At the same time, however, fees remain the biggest concern among LPs. 

“The investor community is becoming more sophisticated in the way it looks to access the market, whether it’s through separate managed accounts, co-investments, direct investments; they are finding ways to get around some of the fee issues. I think we’ll see more co-investing in 2015. Fifty-three per cent of GPs said they would offer more co-investment opportunities to LPs,” confirms Elvin.

• Investors favour small to mid-market buyout funds

Over half of LPs (54%) surveyed plan to allocate to small to mid-market buyout funds in 2015, making them by far the most popular fund strategy choice. Interestingly, the same number of LPs said they would invest or consider investing in first-time funds; up from 39% at the end of 2013.

Going back to the dry powder levels, Elvin thinks 2015 could see the return of a lot more mega deals. 

“There was a general lack of them last year compared to 2013. No doubt the level of competition will spur things on this year and we should see some significant deals.”

Private Real Estate 

• Performance is the biggest concern for investors in 2015 

“It’s unlikely that you’ll see the same level of performance in 2015 because of the recovery we’ve seen in real estate pricing. Prices are going up, return expectations are going down. In fact, return expectations across all strategies have ticked down slightly,” comments Andrew Moylan, head of Real Estate Products.

Despite this, one third of investors surveyed said that their real estate fund investments in 2014 had exceeded expectations: a significant increase on 12 months when that figure was just 14 per cent. 

• Large institutions likely to be more active

Preqin’s research reveals that 64 per cent of institutions with USD10bn or more in total assets   look set to make, or consider making, new fund commitments compared to 45 per cent of those that have less than USD10bn. 

Seventy-nine per cent of investors plan to commit more capital this year compared to 2014, underscoring the importance of the asset class. 

From a fundraising perspective, 2014 saw a gradual rise in confidence among institutional investors in real assets, primarily linked to improved performance.  

“As with private equity, the theme seems to be one of fewer funds raising more assets making the market extremely competitive among smaller and mid-sized real estate fund managers,” says Moylan, who sees pricing and competition as a dominant theme in 2015.

On the one hand, real estate managers are holding record levels of dry powder to put to work. On the other hand, SWFs, Asian insurance companies and other institutions are increasingly looking to invest directly in the US and Europe. This is set to make finding the right investment opportunities, at the right price, more challenging, especially in core assets in markets such as New York and London. 

“We think in 2015 there will be more appetite for opportunistic and value-add deals. Core strategies have become too crowded and some managers feel they cannot compete with a SWF. Investment in distressed assets and appetite for secondary market opportunities in places like Spain, Ireland and Portugal will likely rise,” suggests Moylan. 

• Asian investors will be a key investor market

Three quarters of Asia-based investors plan to make new commitments in the global real estate space in 2015; a theme that Moylan says has been on the rise over the last couple of years.  

Compared to US and European investors, Asian investors have tended to have lower RE allocations. This is because, to some extent, they have been prohibited from investing in global real estate. 

“However, as regulations relax, these investors are looking more at global as opposed to just domestic RE opportunities. That’s been a strong theme in the last couple of years,” says Moylan. 

By comparison, only 28 per cent of European investors and 32 per cent of US investors said that they planned to make new commitments. 

• Europe will be a big investment theme 

Although the US still dominates, Europe really took off last year in terms of fund raising. Some EUR21bn in real estate assets were raised, compared to EUR11bn in 2013; the highest level since 2007.  

Blackstone raised the largest ever European real estate fund in March 2014 – Blackstone Real Estate Partners Europe IV – closing with EUR5.1bn. 

“So successful was the fund that they went out and raised an additional EUR1.5bn within a couple of months from existing investors. In Europe, there are still a lot of distressed opportunities to work through. There are still a lot of real estate assets on banks’ balance sheets and managers are seeing opportunities to pick them up as they look to deleverage,” says Moylan. 


Sixty-four per cent of managers surveyed by Preqin plan to deploy more capital in the asset class in 2015 than they did in 2014. Indeed, a considerable 27 per cent plan to invest “significantly more” capital. 

Moylan says that the long-term outlook for infrastructure is positive: “We expect to see more investors carve out dedicated infrastructure allocations in their portfolios because of the attractive yield and stable income potential of the asset class.”

But the more immediate picture for 2015 is mixed with respect to investor appetite. Although the majority of investors plan to allocate more, a sizeable proportion (45 per cent) plan to commit less capital. Overall, however, 57 per cent of investors have a broadly positive perception of the infrastructure market. 

In terms of where managers view investor demand, 68 per cent said that they see more appetite for infrastructure investments among public and private pension funds. Only 23 per cent see more appetite among foundations and endowments. 

“The same competition and price pressures that exist in real estate also exist in infrastructure. There’s high competition but not necessarily a high level of opportunity to allocate capital. Valuations in the tender process for infrastructure projects tend to get pushed up because of large institutional investors like SWFs going direct. Forty-four per cent of managers think asset valuations have increased.  

“There is a challenge of getting capital out of the door in infrastructure at the moment, which possibly explains why investors are more mixed in their outlook for the year,” explains Moylan.

Indeed, 37 per cent of managers surveyed see themselves competing more institutional investors.  

To read the set of Preqin reports in full, please click here

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